Commission – I Don’t Understand it either!

Commission – I don’t understand it either!

If you know anything about me and the firm, you will know that from inception (1999) we removed commission from all financial products that we arranged. This was due to wanting to remove bias between financial products and provide better arrangements for our clients. Admittedly ahead of our time and it wasn’t until January 2013 that commission had to be removed from investments as a result of the regulator’s review of the market.

Yet only this month (January 2015) I am wrestling to understand commission on a tiny life assurance policy that I have arranged for a client. Long story short we asked to remove the commission as usual (reducing the monthly premiums by about 30%). However it appears that in this instance, the insurer only removed “initial commission” and when the terms came through, the renewal commission of £1.06 per month would be paid to us from month 49… until the policy matures in 10 years time. In short we would potentially receive commission of £1.06 a month for 95 months…. not exactly a lot of money, but not what we promised! So I request that this commission be removed, only to find that the monthly premium is reduced by just one pennny a month… rather than passed directly onto the client as I had assumed. In this scenario, the insurer merely keeps £1.05 a month extra as pure profit. Bonkers! OK I know its not a massive sum, but then that’s just because this was a small policy, the cheapest from the market, but multiply it by millions of customers…

So, it would seem to me that I should take this extra commission (not payable for 4 years) and either pass it all to the client or offset it against his fees, but to my mind this merely demonstrates how behind the times some product providers are and why I believe that so few of them have the remotest chance of surviving another thirty years. As for the regulator, in their infinite wisdom, the commission ban only applies to retail investment products… not insurance… no, I dont understand it either!

Dominic Thomas

Industry Figures from the FSA – Less is More

The FSA published its annual report for 2008/09 last month, the second half of the tax year reflecting the problems resulting from the credit crunch and recession. According to the report the number of regulated firms decreased to 27,340 and the number of approved persons (people able to provide financial advice at all levels) shrank to 166,420. If we assume that there are 60m people living in the UK, this equates to an average of 1 “adviser” per 360 people.

The most significant rise in figures was the level of fines levied by the FSA which rose from £4.4m in the previous year to £27.3m with 58 advisers struck off (less than 0.03% of “advisers”). These figures include the Banking sector. Ironically, the FSA did not raise enough income in fees to cover their own costs of regulation (£335m), which were short by £14m, so fees are likely to continue to rise for IFAs partly to cover the shortfall and partly due to the reduction in the number of individuals and firms. So it would appear that IFAs will continue to pay the price for regulation.

It will not help that according to some recent research conducted by MetLife, 1 in 7 of IFAs (about 15%) are seeking to sell their businesses this year. I can reassure our clients that we have no plans to sell the business.

Another irony is that the FSA’s Final Salary Scheme which is now closed to new members of staff (since June 1998) had 495 members, who may be somewhat to concerned that the scheme is still in deficit by a whopping £88.9m, but they remain committed to clearing the deficit by 2019.

I will make no comment.

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